Temporary leases please U.S. malls and retailers

Small, nimble retailers are taking advantage of the recession and larger rivals' woes as they move into abandoned U.S. store fronts with short-term leases negotiated at a discount.

The strategy is growing in the current downturn, retailers and real estate professionals say, an attractive option for landlords in secondary shopping centers trying to fill vacant storefronts and retailers previously denied those locations.

It's absolutely a win-win, said Don Wood, chief executive of Federal Realty Investment Trust (FRT.N). In this kind of market there's more space, there's more activity, so you'll see more of it.

Simply Fashion Stores, an apparel chain catering to black women with stores in 22 southern and central U.S. states, has benefited from landlords willing to offer six-month to three-year leases, rather than the longer terms that have historically been the norm.

At the International Council of Shopping Centers' RECon retail real estate convention this week in Las Vegas, a large sign at the Simply Fashion's booth read, Got Vacancies? We can fill your vacancy problem.

Rodney Barstein, president of the privately held company, described the about-face by landlords who in years past had rejected the small retailer, whose sales cannot support the rents paid by nationally known brands.

For years landlords would look at their rents and it was all about adding value. The more rent they got the more it added value, Barstein explained.

But these days, landlords are less worried about undermining the value of their shopping mall by leasing a space at a lower rent and more concerned with having a steady revenue stream to appease the banks, who have been tight with lending.

We'd have landlords saying 'Rodney, I can't rent to you ... because it lowers my actual rent number.' Now what I'm hearing is landlords are more interested in debt service, Barstein said, referring to mortgage payments to the bank.

In Detroit, for example, the company is paying half of what it was quoted by landlords a year ago.

In the dismal consumer spending environment, large retailers like Mervyns, Linens 'n Things and Circuit City (CCTYQ.PK) have declared bankruptcy and shuttered stores, a phenomenon that has similarly affected smaller chains, causing a wave of vacancies across the United States.

The retail vacancy rate at the end of the first quarter was 7.2 percent, a full percentage point higher than a year earlier, according to real estate research firm CoStar Group (CSGP.O).

While some landlords may opt to sit out the slump, betting on an improvement right around the corner, the more pessimistic may cut their losses and make a deal.

If you think you're going to get more rent a year from now than you are today, then you've mothballed the space, explained Chris Quincy, whose company, Quincy and Co, owns about a dozen shopping centers in New England.

But if you don't think the market is going to be appreciably better, you're better off getting the best deal you can do today because every month you lose is a month you'll never get back, he added.

John Bemis, director of leasing and development for Jones Lang LaSalle (JLL.N), called the short-term lease strategy an integral part of any mall platform, adding that on a center-per-center basis, annual rental income from those stores averages about $900,000.

The storefronts leased to retailers are often already equipped with fixtures and dressing rooms, so often only a new coat of paint is needed and retailers can set up shop quickly.

Local retailers dominate such transactions, and seasonal merchants, whether sellers of Halloween costumes or Christmas ornaments, have always played a part. But the short-term leases also work for retailers who want to enter a particular mall, but want to test the waters first.

Leasing to retailers who do not expect a long-term deal also helps landlords avoid a depletion clause in many real estate deals that allows tenants to switch locations or get a rent cut if occupancy rates at their mall shrink below a certain point.

And if a new tenant comes along who is willing to sign a 10-year deal, for example, the temporary one will get bumped.

That's the downside for the retailer, Bemis said. Now the upside is you get a cheap deal, you get an opportunity to test the store without massive capital output but you do have to run the risk.

But retailers have a lower chance of being kicked out if landlords face multiple vacancies in their strip mall.

If it's the last vacancy in a shopping center, chances are we'll get kicked off, Barstein said. If there are a half dozen, chances are he won't lease all of them and we'll end up staying month-to-month.